C4 Management Control and System

MMV14003 INDUSTRIAL AND SYSTEM ENGINEERING| SEM 2 20182019
CHAPTER 4: Ts. Mohd Fairuz Bin Marian

MANAGEMENT CONTROL AND SYSTEM
HIGHLIGHTS
1. Standard costing: variance analysis, budgetary control, zero-
based budgeting, and contribution analysis.
2. Profit centre, cost centre, investment centre concepts: transfer
pricing.
3. Financial planning and control: Working capital, investment,
financial structure, dividend decisions, Capital evaluation
techniques.
© FAIRUZM@UTHM.EDU.MY | 2019 2
IMPORTANCE MANAGEMENT CONTROL
What does Control mean?
Press the accelerator - and your car goes faster.
Rotate the steering wheel, –and it changes direction.
Press the brake pedal, –and the car slows or stops.
With these devices,

§By control speed and direction; if any of them is inoperative,
§The car does not do what you want it to. In other words, it is out of control
MANAGEMENT CONTROL
§Assure that resources are obtained and used effectively and efficiently in
the accomplishment of the organization’s objective.
§Has financial and non financial performance measurement.
§Concerned with the implementation of strategies and task control.
STANDARD COSTING
§Standard costing is a technique which establishes predetermined estimated of the costs of
products and services and then compares these predetermined costs with actual costs as they
are incurred.
§The predetermined costs are known as standard costs and the difference between the
standard cost and actual cost is known as a variance.
§The three components of standard costing:
1. Standard costs, which provide a standard, or predetermined, performance level
2. A measure of actual performance
3. A measure of the variance between standard and actual performance
§How standard costing differs from actual costing and normal costing.?
- Standard costing uses estimated costs exclusively to compute all three elements of product
costs: direct materials, direct labour, and overhead.
VARIANCE ANALYSIS
§The process by which the total difference between actual cost and standard cost is
broken down into its different elements is known as variance analysis.
§It can be used in a variety of costing situations, batch and mass production, process
manufacture, transport, certain aspects of repetitive clerical work.
§Undoubtedly, the greatest benefit is gained when the manufacturing method involves
a substantial degree of repetition. Its major application in practice is in organizations
involved in mass production and/or repetitive assembly work.
STOP AND APPLY
DIRECT MATERIAL COST VARIANCE
MATERIAL VARIANCE ANALYSIS
EXAMPLE COST VARIANCE ANALYSIS
§We will use a simple example to demonstrate how the variances are calculated for
direct material, direct labour and variable overhead.
ANSWER
(A) Direct Material Total Variance
unfavorable
(B) Direct Material Price Variance
unfavorable
(c) Direct Material Usage Variance
favorable
Check: - RM8,569 (U)+ RM595 (F) = RM7,974 (U - the correct total variance).
BUDGET AND BUDGETARY CONTROL
§Budget is a financial plan for businesses, prepared in advance.
§Budgets are prepared for main areas of the business – purchases, sales (revenue), production,
labour, trade receivables, trade payables, cash – and provide detailed plans
§Budgets can be income budgets for money received, eg a sales budget, or expenditure
budgets for money spent, eg a purchases budget.
§Most budgets are prepared for the next financial year (the budget period), and are usually
broken down into shorter time periods, commonly four-weekly or monthly.
§This enables budgetary control to be exercised over the budget: the actual results can be
monitored against the budget, and discrepancies between the two can be investigated and
corrective action taken where appropriate.
§Budgetary control is a control technique whereby actual results are compared with
budgets.
OVERVIEW BUDGETARY CONTROL
BUDGETARY CONTROL AND RESPONSIBILITY
CENTRES
§These enables managers to monitor organizational functions.
§A responsibility centre can be defined as any functional unit headed by a manager
who is responsible for the activities of that unit.
§There are tree (3) types of responsibility centres
Cost centers
Profit centers
Investment centers
COST CENTRES
COST CENTERS
In a cost center, managers are responsible for costs only. A cost

center may encompass an entire department, or a department
may contain several cost centers.
The determination of the number of cost centers depends on cost-

benefit considerations—do the benefits exceed the higher costs of
reporting?
PROFIT CENTRES
PROFIT CENTERS
Profit-center managers are responsible for controlling revenues

as well as costs—that is, profitability.
Profit centers exist in nonprofit organizations, despite the name,

(though it might not be referred to as such) when a responsibility
center receives revenues for its services.
INVESTMENT CENTRES
INVESTMENT CENTERS
An investment center adds responsibility for investment to

profit-center responsibilities. Investment-center success
depends on both income and invested capital, measured by
relating income generated to the value of the capital employed.
ZERO BASE BUDGETING (ZBB)
§"A method of budgeting whereby all activities are re-evaluated each time a budget is set.
Discreet levels of each activity are valued and a combination chosen to match funds
available."
§ZBB as a planning and decision making technique reverses the process and procedure of the
traditional budget setting model.
§ZBB make no initial assumptions. The manager of each business unit compiles the budget by
assessing each potential activity from scratch – the zero base.
§Mangers should evaluate the value added benefit from the activities by asking question as
follows:
Is the activity or function necessary?
Does the activity add value?
If the activity wasn’t carried out, what would be the consequences?
Is the activity performed effectively?
Is it cost effective?
FINANCIAL PLANNING AND CONTROL
§Financial Planning:
The projection of sales, income, and assets based on alternative production
and marketing strategies, as well as the determination of the resources
needed to achieve these projections
§Financial Control
The phase in which financial plans are implemented, control deals with the
feedback and adjustment process required to ensure adherence to plans and
modification of plans because of unforeseen changes.
WORKING CAPITAL
§Working capital could be defined as the portion of assets used in current
operations.
§The term working capital is commonly used for the capital required for day-to-day
working in a business concern, such as for purchasing raw material, for meeting day-
to-day expenditure on salaries, wages, rents rates, advertising etc.
COMPONENT OF WORKING CAPITAL
FINANCIAL INVESTMENT
§What is an investment?
“An investment is the current commitment of resources for a period of time in the
expectation of receiving future resources greater than the current outlay”
What kind of investment to make?
1. Real assets vs. Financial assets
Tangible assets vs. Claims on assets
2. Direct vs. Indirect financial investments
Individual securities vs. “pools” of assets
3. Derivatives
Futures, options
TYPES OF INVESTMENT
§Stocks - An investment that represents ownership in a company or corporation.
§Bonds - A security representing a loan of money from a lender to a borrower for a
set time period, which pays a fixed rate of interest.
§Mutual Funds - An investment that pools money from several investors to buy a
particular type of investment, such as stocks.
§Real Estate - An investor buys pieces of property, such as land or a building, in hopes
of generating a profit.
§Savings/Certificates of Deposit - A deposit that earns a fixed interest rate for a
specified length of time. The longer the time period the greater the rate of return.
There is a substantial penalty for early withdrawal.
§Collectibles - Unique items that are relatively rare or highly valued.
RISK VS RETURN
§On average, stocks have a high rate of return
The increase or decrease in the original purchase price of an
investment
§Higher rate of return = greater risk
Uncertainty about the outcome of an investment
§Stocks provide portfolio diversification
Money invested in a variety of investment tools
DIVIDEND
§Dividend refers to that part of profits of a company which is distributed among its
shareholders.
§Dividend is the right as well as reward of the shareholders.
Investors à maximum returns
Company à long term growth
if a company provide more dividend to its shareholders then it has to meet its future
requirement through issue of shares or debt.
DIVIDEND
Form of dividends:
Profit Dividends
Liquidation Dividends
Interim Dividends
Final Dividends
On the basis of medium which they are paid:

Cash Dividend
Scrip or Bond Dividend
Property Dividend
Stock Dividend

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MMV14003 INDUSTRIAL AND SYSTEM ENGINEERING| SEM 2 20182019

CHAPTER 4: Ts. Mohd Fairuz Bin Marian

With these devices,

(B) Direct Material Price Variance

(c) Direct Material Usage Variance

In a cost center, managers are responsible for costs only. A cost

The determination of the number of cost centers depends on cost-

Profit-center managers are responsible for controlling revenues

Profit centers exist in nonprofit organizations, despite the name,

An investment center adds responsibility for investment to

On the basis of medium which they are paid:

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